Joining me on the call today are Mr. Hongyi Zhou, Chairman and CEO; Mr. Alex Xu, co-CFO of the company. For today's call, management will first discuss operational and financial highlights for the second quarter of 2012, and then we'll open up the call for your questions.

Before we continue, I would like to refer you to our Safe Harbor Statements in our earnings press release, which applies to this call as we may make forward-looking statements. This call also includes discussions of certain non-GAAP financial measures. Please refer to our earnings press release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during the call are in US dollars.

Now I would like to turn the call over Hongyi Zhou, Chairman and CEO of Qihoo 360.

Hongyi Zhou

Thanks, Helen. Good morning and good evening, everyone. Thank you all for joining us today.

I'm pleased to report another quarter of strong financial and operational achievement, including growing our PC active user base to a record 425 million and our smartphone user base to about 120 million. We not only maintained our leadership in PC internet but also established Qihoo as one of the leading mobile internet players in China. We have once again outpaced the industry, delivering another solid quarter of triple-digit year-over-year growth, which was accomplished despite macroeconomic concerns.

We continue to grow our business in the face of industry headwinds through solid execution of our growth strategy and commitment to technology innovation and best-in-class user experience. As a leading internet company in China, we continue to enhance our -- we enhance our --

Alex Xu

Competitive.

Hongyi Zhou

-- competitive position in the second quarter, as I mentioned earlier, as the users of our PC-based products and service reached 425 million in June, according to data from iResearch, and our user base represent 94% of the China active PC internet users.

In the past few months, we leveraged our strong market position in web browser to gradually introduce some personalized features to our personal data page. We have seen a very positive reaction from our users and advertising customers. These features along with other [inaudible] page will gradually add significant levels of CPC and CPS-based advertising to our service, which will meaningfully enhance the efficiency of our traffic monetization over time.

A few days ago, we launched our general search product. While it is still in its early stage, we are seeing very encouraging results in terms of user traffic and reaction. In our view, it is a game-changing product that will give Qihoo a meaningful share of the market billion-dollar search advertising market in China. We're certainly looking forward to becoming a major player in this market in the long run.

Our mobile internet user base continues to expand and Qihoo's mobile security solution gained traction and market share amongst smartphone users in China. According to data from iResearch and [CCIB], total smartphone user of Qihoo 360 mobile security solution already reached 120 million, representing almost 70% of the market share in smartphone mobile security, giving us a very clear leadership position. Building upon the popularity of our mobile security solution, we also offer competitive mobile internet products portfolio that will further expand our influence in mobile internet. 360 Mobile Assistant and app store for Android has become one of the most popular Android market players in China since its launch less than one year ago. 360 Mobile Browser also well-received by Android and iOS mobile device users in China.

During the second quarter, we introduced 360 [co-brand] smartphone with [startup] domestic handset manufacturer. These smartphones are preloaded with Qihoo 360 full package of mobile internet products and offered to users at a best in market price to performance with retail. They are widely popular among users. With this offering, we not only form strong relationships with key industry players and create a distribution channel for our mobile internet products, but also closely link the Qihoo 360 brand with mobile internet.

Through all of these strategic efforts, we have gradually established ourselves as a leading player in China mobile internet. We will continue to make a solid investment in product development and technology and expand our coverage in both PC and mobile internet. In addition, we are building our cross-platform reach by providing cloud-based service, which enable users to seamlessly aggregate their digital [lives] in PC and mobile internet.

While the markets we serve are still weaker than they were a year ago, we see some early and --

Alex Xu

Tentative.

Hongyi Zhou

-- tentative sales of stable --

Alex Xu

Stabilization.

Hongyi Zhou

-- stabilization. We are confident that the product initiatives we launched earlier this year will prove as meaningful enhancements to our monetization capability and accelerate our growth in the second half of 2012 and beyond.

With that, I would like to turn the call to our Co-CFO, Alex Xu. He will go over some operational and financial details.

Alex Xu

Thank you.

Despite the uncertainty in the macro environment during the second quarter, we were able to achieve our goals and demonstrated strong year-over-year growth in our business from both operational and financial perspective.

Total monthly active users of Qihoo 360's PC-based products and services reached a record 425 million compared with 378 million a year ago and 411 million in the prior quarter. User penetration of our PC-based products also reached a record 94% compared to 92% a year ago and 93% in the prior quarter.

Total smartphone users of Qihoo 360 mobile security products reached approximately 120 million, representing almost 70% of the smartphone security market, according to data released by iResearch and [CGIB]. This is a significant increase compared to just over 50 million at the beginning of 2012. We are pleased with the progress and continue to see strong momentum in our mobile internet user growth.

Monthly active users for Qihoo 360 browsers were 272 million compared with 209 million a year ago and 273 million in the prior quarter. Qihoo 360 browsers user penetration rate was 61% compared with 52% a year ago and 62% in the prior quarter. I would like to remind everyone that the above user statistic of our products are based on data from iResearch.

Average daily unique visitors to 360 personal startup page and its sub-pages in the second quarter were 83 million compared to 42 million a year ago and 77 million in the prior quarter. Average daily clicks of 360 personal startup page and its sub-pages in the second quarter was 368 million compared with 124 million a year ago and 295 million in the prior quarter.

As of June 30, 2012, we had a total of 98 games commercially running our web game open platform. Total web game paying users reach 148,000 in June. Web game gross ARPU for this quarter was approximately RMB400.

Now, moving to the financial performance for the quarter ended June 30, 2012.

Revenue were $72.8 million, an increase of 107% from the second quarter of 2011 and up 5% from the prior year. The strong year-over-year growth was driven by both online advertising and internet value-added service, although internet value-added service once again outperformed online advertising in the quarter. No single customer contribute more than 10% of total revenue during the quarter.

Online advertising revenue were $50.8 million, up 90% from the same period last year and 12% from the prior quarter. Further market penetration of our key products such as 360 browsers and personal startup pages as well as increased user activity were the main driver behind the robust year-over-year growth. The more modest quarter-over-quarter increase primarily reflect a subdued macro environment. Within online advertising, search referral revenue were $6.9 million compared with $4.5 million in the same period last year and $5.3 million in the prior quarter.

Internet value-added service revenue, which are mainly derived from web games, were $21.7 million, up 167% from same period last year and 4% from the prior quarter. The strong year-over-year performance was mainly driven by solid growth in our game user base. Within [RS], web game revenue were $19.1 million, up 189% from the same period last year and up 10% from the prior quarter. The modest quarter-over-quarter growth in [RS] was primarily due to the negative impact from the termination of fee-based Remote Technical Support service early in the second quarter.

Revenue from selling third-party antivirus products were $19,000 compared with $214,000 in the same period last year and $124,000 in the prior quarter. As we have mentioned in our previous calls, this business has been largely phased out and therefore insignificant. We will no longer break out this line of revenue beginning in the third quarter of this year.

Cost of revenue was $6.6 million compared with $3.7 million in the second quarter of 2011 and $7.6 million in the prior quarter.

Gross margin was 90.9% compared with 89.5% in Q2 2011 and 89% in the prior quarter. The improvement in gross margin was primarily due to the absence of Remote Technical Support revenue, which normally generates lower gross margin than our corporate average.

GAAP operating expenses were $56.3 million compared with $18.7 million in the second quarter of 2011 and $47.2 million in the prior quarter.

Share-based compensation was $13.6 million compared with $2.1 million in the second quarter of 2011 and $11.7 million in the prior quarter. The year-over-year and quarter-over-quarter increase in the share-based compensation were primarily due to significant increase in the company's talent pool, particularly in product and development areas. Also in the second quarter of 2011, a year ago, a one-off marked-to-market [re-management] of a non-employee share reward significantly reduced our share-based compensation for that period. For the second quarter of 2012, share-based compensation in sales and marketing, product development and G&A were $5.8 million, $5.6 million and $2.3 million, respectively.

Non-GAAP operating expenses, which excluding share-based compensation, were $42.7 million compared to $16.6 million in the second quarter of 2011 and $35.5 million in the prior quarter. The year-over-year and quarter-over-quarter increase in non-GAAP operating expense were mainly driven by increased personnel related expense as we continued to strengthen our technology and product development capability and to lay the groundwork for new services we launched recently.

Non-GAAP operating income, which excluding share-based compensation, was $23.6 million compared with $14.8 million in Q2 2011 and $26.1 million in the prior quarter. Non-GAAP operating margin were 32.4% compared with 42.2% in Q2 2011 and 37.7% in the prior quarter. The year-over-year and sequential non-GAAP operating margin decline was as expected and primarily reflect our efforts to expand our product development in mobile internet, cloud-based services and search technology.

Incremental buildup of our infrastructures to support the new service offering also put pressure on margins. We expect similar margin pressure to continue in the near term, particularly after our launch of Qihoo's comprehensive search engine just a week ago. We expect our general search service to ramp up quickly in terms of traffic, therefore demanding additional infrastructure support. The upfront costs associated with the search products will typically lead to monetization in a few months.

GAAP net income was $7.0 million compared with $11.1 million in the Q2 2011 and $14.1 million in the prior quarter. Non-GAAP net income, which excludes share-based compensation, was $20.7 million compared with $15.8 million in Q2 2011 and $25.8 million in the prior quarter.

Non-GAAP net margin was 28.4% compared with 37.6% in the second quarter of 2011 and 37.2% in the prior quarter. In addition to the above-mentioned operational factors, the year-over-year decline in non-GAAP net margin also reflect a foreign exchange loss of $1.9 million incurred in the second quarter of 2012 due to the RMB depreciation against US dollar.

Hello?

Helen Wu

Operator?

Operator

This is the operator. Please continue your presentation.

Alex Xu

Sorry for the buzz.

The quarter-over-quarter decline in non-GAAP net margin was primarily due to the absence of a $3.6 million gain from assets disposal recorded in the first quarter of 2012 and the much larger foreign exchange losses in the second quarter of this year.

As of June 30, 2012, we had cash and cash equivalent balance of $358.9 million. Net cash provided by operating activities in the second quarter of this year was $18.1 million, and capital expenditure was $13.1 million. Adjusted EBITDA, which excludes share-based compensation, was $25.6 million in Q2 2012.

Now I would like to provide a brief business outlook. Taking into consideration the continued subdued macro environment, we are providing a cautious outlook for the third quarter of 2012 and expect revenues to be between $81 million and $82 million, representing a year-over-year increase of 71% to 73%.

Thank you. And that concludes our prepared remarks. We're happy to take any questions you may have. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions].

Your first question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question, sir.

Timothy Chan – Morgan Stanley

Hi. Zhou Hong, Alex, good morning, and thanks very much for taking my questions. I have two questions.

The first is more on the search business. Could Zhou Hong maybe talk about your vision on the comprehensive search that you just launched? What do you think about your longer-term market share target? And how should we think about the monetization in the near term? And I have a follow-up question. Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Tim, thanks for your question. Basically if you look at the Chinese users' behavior in terms of using search, normally they're doing it in browser setting. In recent years, actually a lot of them are doing it in a personal startup page setting, or some people call the navigation page setting. And since we have very strong market position in both the browser as well as the personal startup page, when we launched our search products a week ago, we received very positive feedback and response from the users and market participants. It's actually better than we had expected. And for us, really the reason we do this general search is really we want to provide better user experience and more options or selections for users in terms of when they conduct their search.

As you know, in current environment prior to our launch of search, the overall user search experience in China is not that ideal. And we believe as long as we provide a better service, we should be able to gaining market share along the way and eventually become a major player in this market.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

In terms of monetization, I think -- I don’t think we have a definitive kind of a time can give you, because search is such a mature technology and such a mature business model. So at the end of the day, it's all really dependent on how well the traffic ramp. If the traffic ramp to a certain level, then the monetization become a natural following step for us.

Timothy Chan – Morgan Stanley

Thank you. My second question would be more on your personalized recommendation links. Can you maybe give us more update on those links? How would that contribute to your advertising growth for the second half this year? And finally, what is your advertising sales exposure by category? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Yeah. Tim, I'll take the question.

So far, since we launched the personalized recommendation in May of this year and start to monetize in July and third quarter of this year, we have seen very positive reaction from advertisers, because it gives them the opportunity to really provide per size and performance-based advertising positions. And I can't give you exactly numbers because it's premature to give the number, but there are a couple of things I want to say.

Number one is that you probably should expect a very significant number of customer increase in the, as we're speaking, in the quarter. And we also observed higher-than-average user activity among the personalized links compared to other fixed links on the page.

In terms of mix between the advertising revenue, between the verticals, e-commerce continue to be a 50%, slightly over 50% contribution. Within e-commerce, group buys contribution dropped quite meaningfully to about just over 10% compared to maybe 16%, 17% last quarter. And the rest of the mix doesn’t really move that much. Second largest vertical is still gaming, which is about 9%-ish kind of a revenue. And so that's to your question.

Also I want to let the operator know. Given the time constraint, we want to limit our questions to one question only, and then please go back to the queue for other questions. Sorry.

Operator

Thank you, sir. Your next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

Jiong Shao – Macquarie

Thank you very much for taking my one question. And congrats on the launch of your search product last week.

My question is also on the search side. I was just wondering, what's your rough estimate of the percentage of search queries today in China come from your sort of browser page, that little box on the top of the page.

And another clarification is that, I think you mentioned earlier, the Google revenue last quarter was $6.9 million, and it seems now you've replaced the Google with your own search engine as the default search engine on your startup page and your browser. What's your assumption for this part of the business in Q3 in your guidance of $81 million, $82 million, how much you sort of have modeled for this part of this business, how much we should model going beyond Q3? Does that just go to zero or nearly zero? Thank you very much.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Jiong, basically, for the total search query contributions through our channel, the one thing that we roughly know is that, for Google, we probably contribute somewhere between 40% to 50% of Google's total China traffic. For Baidu, it's hard to say, because there's no official release of how many Baidu's queries they have every day. So it's still -- we don't to jump into the conclusion on that. You probably want to wait for a month or so when the third parties come up with the latest statistics that give you a more indication of how big the traffic we have on the search end.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

And also the other indicator you'll probably want to look at is, if you go to [Weibo] or other some sort of a website, manager site, just look at their posting and their reaction, according to them, basically, we already generate a very significant amount of traffic out of our new search products. So that's, although not comprehensive, but at least certain data point you can use for the reference.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

And then to your second question in terms of Google relationship, we are -- we have been a very good partner with Google over the course of the last few years and supporting them in China in terms of generating traffic and everything. But as you know, the very well-documented reasons, user experience for Google Search in China is not that ideal, and for some users, they simply, no choice, you have to switch up to some other search services. So that's why we provide the alternative, to provide a better user experience.

But if you look at our search product, you will find that on the one hand we provide our own search results and then we also have options for users to pick. If they want, they can still use Google or even Baidu for that matter. We certainly hope we can maintain some kind of a relationship with Google going forward.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Just, yeah, just one clarification. When we talk about Google Search user experience is not ideal, it's not because Google product issue, it's more related to their position in China. Thank you.

Operator

Your next question comes from the line of Bin Liu from Citigroup. Please ask your question.

Bin Liu – Citigroup

Thanks, Zhou Hong, Alex. One question on your advertising business. It looks Q-on-Q growth for the advertising revenue still relatively strong in the weaker macro environment. We note that the pricing may not increase much faster Q-on-Q. What's the driver for your advertising revenue growth this quarter? And what's your rough guidance for the growth space for the second half? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Bin, basically for the second quarter, I would say the main driver for the -- for our advertising growth continue to be the traffic growth. We have seen very strong momentum in terms of total clicks in terms of the users' activities and everything. So that's probably the main driver. During the quarter we did not raise prices, generally speaking, for our advertising. So it's more traffic-driven.

And in terms of third quarter, in addition to continue to generating strong traffic growth, the slightly better environment where we can push through a little bit price increase. And also more importantly, as I mentioned earlier, we have this more CPC or CPS related advertising service available to the market during the third quarter and beyond. So that will also help us drive additional growth in terms of advertising.

Overall, I would say, as we emphasized in the previous calls, that you will see accelerate in the third quarter and beyond in terms of advertising. Thank you.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

Tian Hou – T.H. Capital

Yeah. Alex and Zhou Hong. So the question is really related to R&D, product development. The margin has, you know, the percentage of revenue has gone up a lot. So, what's the trend there? And who, you know, [halfway] really hire, what kind of a person we hire in the -- with our plan in that front?

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Tian, basically, if you look at really our product development investment, are really to support our long-term growth. There are three main areas that we are focusing at this point. One is mobile internet, obviously, it's very, very important. And the secondly is cloud-based services, which we launched our cloud-based storage a few months ago. And third is search. And as you can see that search itself, a lot of other major internet companies are trying to do some search, but seems not many successful stories out there. But for us, the first launch of these products we get very good response and very good feedback from users. And in terms of product of quality wise, it's comparable to the leaders in the market, which means we should have a fairly strong developing team to support these products.

So these are the areas we will continue to invest on, and we believe very important to drive long-term growth, even though in the near term you probably will see some cost pressure on there.

And also the other thing to probably keep in mind, at least for now, majority of the bandwidth cost we incurred are in the R&D. So it's not just personnel-related, and bandwidth is also a very significant portion, particularly when you run -- ramping up your search service, the traffic volume going up, you will see increased bandwidth cost as well. Thank you.

Operator

Your next question comes from the line of Wendy Huang from CIMB. Please ask your question.

Wendy Huang – CIMB

Thanks. Can you remind us what percent of your advertising revenue are from the homepage and how will the launch of the personalized homepage change its contribution to the total advertising revenue? Thank you.

Alex Xu

[Chinese language spoken]

Wendy, I think the homepage, the main page continue to contribute about 75%-ish of the advertising. The percentage is not changing that much. Keep in mind, the personalized feature launched, being commercialized, being monetized starting third quarter. So the second quarter, really there's not much impact in the second quarter for that part of the service. Thank you.

Operator

Your next question comes from the line of Andy Zhao from Bank of America. Please ask your question.

Andy Zhao – Bank of America

Thank you, Alex and Zhou Hong. Congratulations on strong quarter.

I have a very simple question, regarding search engine, what kind of cost we expect for the third quarter or the coming quarters, including personnel, server and bandwidth? Thank you very much.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Andy, I think from development perspective or personnel perspective, in terms of R&D, we probably already, since we already launched the product, so the R&D personnel is pretty much already in. But then along the way, as we move forward, we may need to gradually build up our sales and marketing structure or the search service. So that's from personnel perspective.

And then -- but the other two segment, the servers and the bandwidth, even though we build a fairly sizable server bank to support the initial launch, but as we move forward with the traffic going, you probably should expect to continue to increase in terms of need for additional servers, and particularly additional bandwidth. So these are basically, generally speaking, the costs will be put in. Thank you.

Operator

Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.

Cynthia Meng – Jefferies

Thank you. Thank you for taking my question. I had one question on the mobile strategy. Can management give any updates on Qihoo's mobile services? And what is your vision for monetization of -- future monetization of mobile internet? Would that first come from mobile search or mobile games? And related to games, does Qihoo have any plans to do client-based games since you are cooperating with Giant? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Cynthia, basically from -- in terms of mobile strategy, I think we still believe smartphone penetration will continue to increase in China, particularly with the RMB1,000 or below kind of smartphones put into market. And with this kind of penetration, particularly Android-based penetration, security continue to be the very important issues among the mobile internet users. So we will continue to leverage our brand and leverage our expertise in the mobile security, continuing to gain user base.

And second, more important space is really the marketplace or the app stores. Basically in China, at least today, a lot of users are still using their PCs to get app, then use the cable or USB cable to load it to their phone. That's where our mobile assistant products play and essentially create a bridge between our user -- PC-based user base and mobile-based user base. And even though we just launched in less than a year, today our Android-based app store has already become one of the largest marketplace in China. And basically for all other mobile-related products we offer, the goal is to create a link between the PC and mobile using our cloud-based services, overall create a more comprehensive and cross-platform kind of environment.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

In terms of mobile monetization, I think basically compared to mobile advertising versus mobile game, probably at least for now, mobile game probably have more potential, because a lot of Chinese mobile internet users are willing to play games on mobile and buy in-game items on mobile. And if you look at our app store, the largest marketplace we have, mobile game is still the number one download among all the other apps.

So, if anything, say, mobile game monetization will come earlier than others. But again, mobile monetization is something probably a little bit on the longer term than the near term.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

In terms of the client-based games, basically we'll probably use the same strategy as we do on the web game, where for -- we will build a platform, introduce all the third-party games, we ourselves won't develop those games, but rather introduce those games to our users through the platform. Thank you.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

And then, our relationship or partnership with Giant is just really the starting point. As you know, in China, the overall web game business is transitional from a large client-based game to more lighter, web or lighter client-based game. With this kind of a transition, we want to use this Giant relationship as an example. If we are successful on that, we probably will develop more relationship with other developers and eventually create a similar revenue-sharing models in among those games. Thank you.

Operator

Your next question comes from the line of George Askew from Stifel Nicolaus. Please ask your question.

George Askew – Stifel Nicolaus

Yes. Thank you. You mentioned the launch of monetization for 360 Company and search will start by yearend. Will your monetization involve the auction of key words or will it paid links that are time-based? And how long will it take, if it is a keyword-driven market, how long will it take for you to ramp up an efficient keyword market with thousands of advertisers and millions of keywords? Thank you.

Alex Xu

George, say that again? Sorry. You mean the monetization of search or monetization on the personal recommendation? George?

Operator

Just one moment, sir, just retrieving Mr. George for leaving the line. Won't be a moment, sir.

Please repeat your question, sir.

George Askew – Stifel Nicolaus

Hello. Okay. Sorry about that.

You mentioned that you'll launch monetization for search, for 360 comprehensive search by yearend. Will your monetization involve the auction of keywords or will it be paid links, time-based paid links driven? And if it is auction-based keywords, how long will it take you to ramp up an efficient keyword market that obviously needs to include millions of keywords and thousands of bidders?

Alex Xu

Okay. Thank you.

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

George, basically, because search monetization is such a mature kind of system, we don't think there is a whole lot of issues there. And if you compare us to, for example, to -- compare that to existing search engines in China, like Google and Baidu, I would say we probably will prefer Google's monetization model, where you give -- you're taking care of not only the user experience but also the advertising results.

And in terms of the keywords, obviously you should have tens of thousands, if not millions, kind of keywords. That's the whole thing about the search where you touch the [long tail] portion of the market, give us significant potential. And if you recall, the company's origin, Mr. Zhou's origin is actually a search engine background, over the course of the -- in the past, his experience, he has established a fairly strong relationship with the partners in the search advertising channel. So these are certainly very useful resources we can re-link and to help us touch tens of thousands of the [long-tail] advertising customers. Thank you.

Operator

Your next question comes from the line of [Nancy Yang] from [86 Research]. Please ask your question.

[Nancy Yang] – [86 Research]

Hi. Thank you for taking my question, and congrats on launching search. My question is on search traffic side. Can you give us a sense for what percentage of your browser users have switched the default search away from your own search so far? And then as my follow-up, what will you do to drive higher search traffic besides changing the browser search default in the coming quarters? For example, should we expect an aggressive expansion of your traffic affiliate network and a significant rise in traffic acquisition costs? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

[Nancy], I guess it's a little bit premature to give any precise data because we just launched less than a week ago. But the one thing that we can say is really the conversion rate from other search to our own search is actually much better than we had expected. So that's one.

Secondly, even after this high conversion rate, really we haven't reached, not even close, to our full potential to our own internal potential yet. If you recall, we have 400 million plus security product users, 270 million browser users, and 100 million of the personal data page users. If we can convert a sizable portion of these users to our search products, that will become itself, become a very major market player in this area. So, at least in the near term, our focus is still to using our own system to convert users to our search.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

And also want to add a couple of points. One is that why the 360 search gaining -- very quickly gaining popularity, one really has something to do with users' habit, because in China, most users or a very big percentage of users search, they do search either through the browser's search box or through the personal startup page, and where we, both of them, we have very strong positions in, that help us enormously to push through our search service.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

And then secondly, it's really, at the end of the it's the user experience determine where they do search. Given the traffic pattern we've seen in the past few days, I would say at least the initial user reaction, they feel that 360 search results is at least comparable to other leaders in the market. This is a very good initial reaction. And I think when people talking about, or thinking about Qihoo 360, they may think about Qihoo as a security company, even as a browser company, but probably a lot of people forget that the origin of this company is actually a search engine company. We have the search engine gene built in the company and we also have a very notable track record in the past. So that gave us a very -- condition and confidence that we can become a major player in search market in China. Thank you.

Operator

Your next question comes from the line of Kevin Kopelman from Cowen & Company. Please ask your question.

Kevin Kopelman – Cowen & Co.

Thanks so much. Just looking at your click growth, it looked really strong in the quarter. Could you call out one or two key factors that you thought drove that growth? And then looking at browser users, can you give us a sense based -- because I know you -- the third-party data showed that they were flat. Could you give us a sense of the trend based on the internal data? And is there any seasonality in that number? Thanks.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Kevin, I think the -- from browser perspective, from our internal data we look at, we see continued growth in terms of the users as well as the -- as well as the penetration, although, as you know, we already have 60% penetration, 60% plus penetration, so the rate of increase probably is not going to be as high as the last year or previous years. But we continue to see expansion of our market share there.

The reason that you see a relatively flattish data from iResearch is because, for one thing, to our knowledge, they are internally -- re-calibrate their statistic model, so that may have something to do with this -- the outcome of the number. And also, the browsers market penetration is somewhat related to the product cycle. In other words, if at one certain given time point that -- where you have a new product launch by any one of the major players, that may skew the number a little bit.

For us, on our part, we probably will launch a newer version of browser fairly soon with enhanced features and innovation. So we will continue to see a gradual improvement in our browser market share going forward. Thank you.

We'll probably take one last question. Sorry.

Operator

Your final question comes from the line of Alicia Yap from Barclays. Please ask your question.

Alicia Yap – Barclays Capital

Hi, good morning. Thanks for taking my questions. My question is also related to search. Can you share with us, is there any difference between your search algorithm versus the search service by your competitors? And what will be the differentiated strategy in addition to the browser and the directory site traffic direction? And is that really a traffic driver rather than a technology barrier? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Alicia, I think generally speaking, since search technology already exists in the market more than a decade, for more than a decade now, it's really a mature technology. I don’t think there's a meaningful or significant difference between our search algorithm compared to the other peers in the market, and because that's the basic of the search.

And then really for us, we believe, given the browser and personal startup page market we have, we can somewhat integrate the personalized features with the search offerings. That may become, from user experience perspective, a differentiator down the road, generally speaking. Thank you.

Operator

Ladies and gentlemen, I would now like to hand the conference back to today's speakers. Thank you. Please continue.

Alex Xu

All right. Thank you, everyone, who participated in the conference call. And if you have any questions, you can contact us through email or give us a call. Thank you.

Hongyi Zhou

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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